LONDON, Feb 19 (Reuters) - With the dust beginning to settle after a tumultuous start to the year for the U.S. bond market, speculators are scaling back their bets on higher yields. By quite a margin.

After building up a record short position in two-year Treasury futures and historically large short positions across other maturities, a reversal was always on the cards.

This sets the market up nicely for what is shaping up to be a huge week for bond investors, as the U.S. Treasury prepares to sell over a quarter of a trillion dollars worth of new debt.

Two factors will have figured largely in the decision of hedge funds and other speculators on the Chicago futures exchanges to cut their short positions in U.S. bond futures: high yields and the explosion of volatility earlier this month.

The biggest reversal was in two-year futures, the latest positioning data from the Chicago futures markets show. In the week to Feb. 13, net short positions were slashed by 76,772 contracts to 133,986.

That’s less than half the record net short of 329,066 contracts just two weeks ago. The reduction in speculators’ net short positions of almost 200,000 contracts in that period is the second largest two-week fall in bearish bets ever.

The reduction across other maturities was also noteworthy.

Net short positions in five-year bond futures were cut by over 100,000 contracts, the eighth largest weekly reduction in bearish bets on record, and the reduction in net short 10-year futures was the first in four weeks.

A short position on an asset is effectively a bet it will fall in price. In bonds, prices move inversely to yields.

The surge in market volatility earlier this month provided the perfect opportunity for hedge funds and other speculators to cash in on what have been extremely profitable trades. Short positions across the curve had become extremely overloaded.

CFTC data show that two-year and five-year bond futures net short positions hit a record last month. Bets last week on 10-year bond prices falling were the biggest in a year and close to the largest net short position ever.

The two-year yield hit its highest since Sept. 2008, the five-year yield its highest in eight years and the 10-year yield its highest in four years.

“From current levels it will take a lot for bond markets to simply keep selling off and we thus remain wary of extrapolating the recent price action into the future,” RBC Capital Markets strategists wrote in a note to clients on Monday.

“We have recommended taking some profits on shorts and would currently keep outright exposure limited,” they said.

The U.S. bond market is closed on Monday for the Presidents Day holiday, but it will still be one of the busiest - and for traders, one of the most testing - weeks for some time.

The Treasury Department will continue ramping up its debt issuance to fund the expected growth in borrowing tied to the biggest tax overhaul in 30 years and a two-year federal spending package.

Last year’s tax reform is expected to add as much as $1.5 trillion to the federal debt load, while the budget agreement would increase government spending by almost $300 billion over the next two years.

The heavy Treasury supply will kick off this week on Tuesday with $151 billion worth of bills including record amounts of three-month and six-month T-bills.

The rest of the debt sales will spread over a holiday-shortened week with $28 billion of two-year fixed rate notes on Tuesday; $35 billion in five-year debt on Wednesday and $29 billion in seven-year notes on Thursday. The Treasury also plans to add $15 billion to an older two-year floating-rate issue.